Limited liability must be written in the contract



Effective exclusion and limitation of liability clauses in technology supply contracts are essential for managing supply risks. However, contractual protection...



Effective exclusion and limitation of liability clauses in technology supply contracts are essential for managing supply risks. However, contractual protection is not always easy to attain. The recent decision of the Technology and Construction Court in the case of Pegler versus Wang emphasises the potential pitfalls for technology suppliers attempting to limit their liability under a contract by insisting on the incorporation of exclusion clauses lifted directly from their standard terms of business.

Facts

Wang had agreed to provide Pegler with a bespoke computer system and associated project management and consultancy services. Pegler alleged that Wang had, among other things, failed to deliver the system on time (or at all) and as a result Pegler terminated the contract and claimed in excess of £20m in damages.

The defence

Wang admitted the breaches of contract, but relied on an exclusion clause in the contract which it had lifted from its own standard terms of business and had insisted was incorporated on a "take it or leave it" basis: the clause excluded liability for "any indirect, special or consequential loss howsoever arising in connection with, or arising out of, the supply, functioning or use of the hardware, the software or the services...".

The judgement

The court held that the exclusion clause did not apply since:

(a) Wang had failed to deliver the system at all, whereas the exclusion clause only applied to liability arising after the system had been supplied, but made no reference to non- or late-supply. If Wang had wanted to exclude liability for late- or non-delivery then it should have expressly done so.

(b) Pegler's claim for damages related to direct losses suffered by it as part of its normal course of business, whereas the exclusion clause only purported to exclude liability for indirect, special or consequential losses.

The Unfair Contract Terms Act (Ucta)

Although the court decided that the exclusion clause did not cover the losses suffered by Pegler, it did confirm that Pegler had dealt with Wang on Wang's written standard terms of business, such that Ucta would have applied. Therefore, the court would have considered whether the exclusion clause was reasonable in all the circumstances. This would have been a further difficult hurdle for Wang to overcome.

For further information please contact DLA's Damian Crosse on 0870-011 1111 or via email

Golden rules for limiting liability in technology supply contracts

  • Tailor the terms of a contract to the specific needs of a given project instead of blindly seeking to incorporate standard terms which may not provide the specific protection required and which may be held to be unreasonable and thus unenforcable

  • Involve technical experts during the negotiations and certainly before agreeing the terms of the contract so that you can be sure that you can meet your obligations under the contract

  • The exclusion clause should seek to expressly cover all obligations under the contract, including late delivery or failure to supply at all

  • The exclusion clause should expressly cover not only indirect or consequential loss, but also direct losses occurring in the normal course of business

  • UCTA is highly likely to apply where exclusion clauses from the supplier's standard terms of business are incorporated into a contract, on a "take it or leave it" basis. Suppliers must consider the potential for the clause to be found to be unreasonable and thus unenforcable

  • The best contractual protection may not always be good enough. Don't forget other ways of safeguarding against the contractual risk of non performance such as insurance

  • Read more on IT risk management

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